Midcap Stocks: P/E pressure

Source: BS
The P/E of mid-cap stocks has surpassed the Sensex P/E again

Mid-cap stocks, which were lagging behind their large-cap counterparts since the past six months, are once again back in the reckoning.

This week, mid-caps stole a march over large-caps, and tipped the performance chart from the beginning of 2006.

The BSE Mid-cap index gained 25.02 per cent as on April 7 from the start of the year compared with the Sensex gaining 23.32 per cent.

Against the Nifty’s rise of 21.8 per cent, the CNX Midcap index gained 22.8 per cent. Even on Friday, when the markets fell, the decline in the mid-cap index was not out of line with the fall in large-cap indices.

This change in investor preference for mid-caps happened over five trading sessions. Analysts attribute relative valuations to be the reason behind the better performance of mid-cap stocks since the beginning of 2006. From 2004 till September 2005, mid-caps did much better than large-caps.

But since September 2005, investors move to large-caps as they appeared cheaper than mid-caps. The Sensex had gained 30.64 per cent for six months ended March 2005, while the BSE Mid-cap was up 27.45 per cent, as relative valuations had made investors shift from mid-caps to large-caps.

With large-caps P/E multiples racing ahead again in the past few months, it was only a matter of time till investors found value elsewhere. Some sectors such as sugar and real estate are only represented in the mid-cap space, which have seen a lot of bullishness.

In September 2005, the P/E multiple, excluding loss-making companies on a trailing 12-month basis, for the Sensex was 17.69 compared with the BSE Mid-cap index’s 18.26. But in the past six months or so, the Sensex P/E has been higher the BSE Mid-cap P/E, except for the past few days.

As on April 6, the Sensex traded at a P/E of 21.43 and the BSE Mid-cap had a P/E multiple of 21.63, indicating that mid-cap stocks are not cheap.

In terms of price appreciation, stocks in sugar, real estate, engineering, construction, cement and pharma have seen big gains.

Though some mid-cap stocks will do better, be it because of sector outlook or financial performance, the current P/E multiple in many of these stocks are stretched. At current valuations, if stock markets decline, mid-caps could see a bigger correction.

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One Response to Midcap Stocks: P/E pressure

  1. Vivek Nath says:

    Good to see you back after few days and that too with a BANG !! I like your blog and its good informative reading .Keep up the good work esp all those nice reports. Wish you could add some picks on stocks for the futures or some gems in mid cap, large cap.. wud make for more interesting reading

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